State of the Union shows Obama is now pro-business. He should be pro-growth.

In last night's State of the Union address, President Obama urged greater US competitiveness. But there's a big difference between cozying up to businesses and promoting policies that foster economic growth.

ByDonald J. BoudreauxJanuary 26, 2011

Fairfax, Va. — Much is being made of president Obama’s new-found friendliness toward business, punctuated by his call “to make America the best place on Earth to do business” in last night’s State of the Union address. While moderates seem pleased, liberals dislike it, and conservatives suspect that the president isn’t sincere.

As an economist, I worry that Mr. Obama is sincere. But my concern about the president’s cozying-up to business differs greatly from the concern that animates the political left.

Contrary to popular presumption, being friendly to business is not the same as being pro-economic growth or pro-free-market.

Adam Smith explained that a nation is wealthy only if its people have ready access to goods and services that make their lives healthy, comfortable, and enjoyable. The greater this access, the wealthier the nation.

Of course, to make available the goods and services that consumers want requires businesses. Unfortunately, throughout history, businesses have too often been saddled with excessive taxes and regulations in well-intentioned but misguided attempts to help workers and consumers.

Economists (especially the free-market variety) – concerned always to keep outputs of goods and services as high as possible – typically defend business against counter-productive government interference. We economists do so, however, not because we have special fondness for business. We do so because we understand that government interference in business often results in fewer goods and services for ordinary men and women – as consumers – to enjoy.

In short, an economy’s success is best measured by how well it pleases consumers, not by how well it pleases businesses.

Surprise: Businesses don't like competition

Each business sees matters differently. It wants to profit as much as possible. In a free market, businesses profit only by pleasing consumers. But a business that obtains special favors from government can profit without pleasing consumers. And it’s here that trouble starts.

Consider Obama’s commitment to make America more “competitive.” (He used variations of the word “compete” nine times in his address as part of his argument that American firms and workers are threatened by their foreign counterparts.) “Competition” sounds good. But businesses don’t like competition; they like protection from competition – along with subsidies, special tax breaks, and other government favors that relieve them from the need to cater energetically to consumer demands. So a pro-business president is prone to curry favor with businesses by shielding them from competition.

Tariffs and other import restrictions are examples of pro-business policies. They increase the bottom lines of those businesses that no longer must compete vigorously against foreign rivals. Such pro-business policies are also anti-consumer and anti-market. They rob consumers of choice; they shrink consumers’ spending power by enabling protected businesses to raise prices; and they stymie economic growth, in part by channeling entrepreneurs’ efforts into lobbying government for favors and away from figuring out how to build better mousetraps.

The irony is that such policies – which really should be labeled “crony capitalist” – are often labeled “competitiveness” policies. Because these policies increasethe profits of some domestic businesses, they are mistakenly believed to make the domestic economy more “competitive” when, in fact, they make it less so.

This abuse of language is further fostered by the habit of speaking of international trade using sports and martial metaphors, such as “level playing field” and “trade war.”

Trade: Why everyone wins

Trade, though, is neither a sport nor a battle. It’s simply what happens when two or more consenting adults exchange with each other on terms that each party to the trade finds agreeable. Unlike in football games or shooting wars, in which the victors win only by making others lose, in trade every party to every exchange wins; every party gains.

And these gains only increase as trade expands across borders. It’s true, as Obama recalled, that there was “a time when finding a good job meant showing up at a nearby factory or a business downtown. You didn’t always need a degree, and your competition was pretty much limited to your neighbors.” But don’t be blinded by nostalgia. That was also a time of far fewer miracle drugs, of more expensive clothing, of automobiles that broke down frequently, of televisions that cost an arm and a leg and received only four channels, and of no cellphones, personal computers, and the Internet.

The fact that trade is mutually beneficial means that Obama’s and others’ concern about America’s increasing trade with foreigners – especially today with China – is unjustified. Americans aren’t losing in these trades, and the foreigners aren’t defeating us.

Yes, America has a trade deficit. But contrary to popular myth, this fact does not mean that America is economically “uncompetitive.”

An American trade deficit means that foreigners are keen to invest in America. And that’s just what they’re doing, in a big way – bigger even than in China, a nation whose impressive economic growth is interpreted by many Americans as a threat to our economy.

Did you know that in the decade from 2000 through 2009, the total amount of foreign direct investment (FDI) received by China was $686 billion, while the total amount of FDI received by the U.S. was $1.8 trillion – by far the largest inflow of capital from foreigners received by any country on earth? America’s receipt of FDI dollars exceeded China’s by 162 percent. On a per-capita basis, the figure is even greater: The amount of FDI America received per person from 2000 through 2009 was ten times (!) greater than was received by China.

So when Obama said in his speech on Tuesday night that “We need to out-innovate, out-educate, and out-build the rest of the world,” he wrongly implied that America currently doesn’t do so well in the international economy. But it does – which is not to say that there isn’t a lot of room for improvement.

The president is correct that tax and regulatory reforms – along with reining in Uncle Sam’s deficit spending – are in order. Especially welcome is his call to lower corporate tax rates. And if calling such reforms “competitiveness policies” improves their chances of being implemented, I’m all for it.

But let’s not be fooled into thinking that America’s current economic troubles are caused by America’s open participation in global trade. Keeping straight about this fact will guard against our turning a blind eye to politicians who try to pass off policies that are pro-business as policies that are pro-growth.